HMRC internal manual

Employment Income Manual

EIM12855 - Termination payments and benefits: compromise agreements: general

An employment is often ended by a separate document known as a compromise agreement.

When an employment comes to an end, an employee often has various potential claims against the employer. For example:

  • salary or wages may not have been paid in full (particularly a bonus)
  • there may be a contractual right to a payments in lieu of notice (PILONs), see EIM12976
  • the employee may think that the employer has failed to put into effect statutory rights under the Employment Rights Act 1996 or other employment legislation
  • the employee may want compensation for an employer’s breach of contractual terms, for example where the employer has given less notice than the contract requires (even though the minimum statutory notice required under the Employment Rights Act 1996 has been given)
  • the employee may believe that the dismissal involves unlawful discrimination on grounds of sex, race, religion or disability.

All of these matters are often dealt with by a single agreement made at termination, usually labelled a compromise agreement. The effect of such an agreement is to ensure that claims cannot later be pursued before Tribunals or Courts.

Perhaps because the compromise agreement is a separate legal document to the employment contract, it may be asserted that it deals only with the termination of employment and so only gives rise to payments and benefits within Section 401 ITEPA 2003 (see EIM13005).

However, there may well be elements included in the compromise agreement that are chargeable under other Sections, particularly Section 62 or Section 225 ITEPA 2003. EIM12856 gives more detail about this.